Options for an eBay Trickle-Down

by Jocelynn Smith | July 16, 2012 9:05 am

Options for an eBay Trickle-Down

Online auctioneer eBay (NASDAQ:EBAY[1]) will show its hand this week when it slips into the earnings spotlight Wednesday after the market closes. But with its weakening technical picture, is now a good time to jump on this one-time tech darling?

Analysts are expecting a profit of 55 cents per share while sales are forecast to come in at $3.36 billion. Meanwhile, the whisper (according to EarningsWhisper.com) sits just a penny higher, and for good reason. Historically, EBAY has a nice trend of coming in just ahead of expectations.

Options players are expecting a pop in the stock following the company’s earnings report, as the stock has seen some heavy call accumulation in its front-month series. In particular, the near-the-money July 40 call has racked up approximately 37,000 contracts, while the 41 call has roughly 15,000 contracts in residence.

On the other hand, the heaviest front-month put contract is the July 39, with approximately 11,000 contracts. From there, put open interest quickly drops off.

Simply, options players have jumped on the bullish bandwagon when it comes to EBAY, banking on a sharp rise in the shares following the company’s earnings report, leaving themselves vulnerable to a sharp downside move in the shares should the firm fail to blow the doors off on Wednesday.

What’s more, a peek at the open-interest configuration for August shows that interest in the stock quickly dries up after the company’s reports earnings. Open interest for the security in August is extremely light, indicating it’s unlikely that any potential pop in the shares will see much follow-through during the next several days or weeks.

Looking at the technical backdrop for the shares, the picture becomes even grimmer. I’ll give you that the equity has enjoyed a nice run higher in 2012, gaining roughly 31%, but it’s looking like EBAY has run out of steam. Since the stock reached its 52-week peak in June near $44, the stock has steadily edged lower, creating a successive line of lower highs — a good sign of dwindling momentum.

Another ugly development for EBAY has been its drop below its 10-week simple moving average. This trendline was solid support for the shares since the start of the year, but with the stock slipping below this key moving average, it looks like the stock is going to pull back a little farther as it shakes loose more of the weaker hands. I look for the equity to first test potential key support at the $35 level — an area that served as an upside barrier throughout most of 2011. If $35 fails to hold the stock, a second line of support likely will appear at $27.50 — a region that served as support in 2011.

Traders looking to take advantage of a retreat in the shares of EBAY should consider the stock’s October 40 put, as I look for the stock to suffer a slow and steady bleed through the next few months.

The near-the-money put was last traded at $2.85, or $285 per contract. To break even on the contract, EBAY shares would need to slip to $37.15, a decline of about 7% from Friday’s close.

As of this writing, Jocelynn Smith did not hold a position in any of the aforementioned securities.